Start your journey to vehicle ownership with the help of our Street Smart video series, brought to you by Absa Vehicle Finance. “If you finance the purchase of your vehicle through a credit provider, it’s important that you fully understand the details of the instalment sale agreement,” says Absa’s SbuDhlamini.

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If you’re in the market to buy a car, you may decide to finance the vehicle’s purchase by means of an instalment sale agreement with a credit provider, such as a bank. In the second instalment of this feature, Sbu (Sibusiso) Dhlamini – head of compliance at Absa – shares some more information on this agreement and the accompanying tax invoice.

If you’ve missed Part 1, click here to view it.

What does the instalment amount relate to?

Dhlamini:The instalment amount is the amount you agree to pay towards repayment of your principal debt, inclusive of interest and your service fee. This amount is clearly indicated on your instalment sale agreement and is calculated by dividing the outstanding balance on your account (including interest, charges, fees and insurance) by the remaining term of your agreement (the number of months).

You may choose to pay your instalment amount monthly, quarterly, bi-annually (twice a year) or annually (once a year) at the variable or fixed rate on the instalment sale agreement.

What is the earliest that I may settle my instalment sale agreement and what is an early termination charge?

Dhlamini:You may settle your instalment sale agreement at any time during the term of the agreement by requesting a settlement figure from your credit provider.

Section 125 of the NCA permits your credit provider to add an early termination charge to your settlement figure if your principal debt is R250 000 or more. This charge is equal to the amount of interest payable on your account for the period from the date you request the settlement figure to the date that you settle the account, but may not be more than 3 months’ worth of interest.

What is a balloon payment?

Dhlamini:You may choose to apply a residual value or balloon payment as your last instalment to your instalment sale agreement. Having a residual value or balloon payment helps to reduce your instalment amount over the term of your agreement, but it’s important to budget and ensure that you’re able to repay this amount in a single payment at the end of the agreement term.

Is there interest charged on the balloon amount and will the final amount include interest charges?

Dhlamini:Interest is charged on the balance outstanding on your principal debt, which includes the balloon amount. The interest payable is included in your instalment amount payable over the term of your agreement so your final balloon payment is a capital amount only, with no added interest.

What if my car is worth less than the balloon payment owing at the end of the term?

Dhlamini: Your car will depreciate in value over the term of your agreement and it is expected to depreciate at a rate of about 20% per annum, although some car brands do depreciate at a lower rate.

How can I reduce the balloon payment during the term of my instalment sale agreement?

Dhlamini: Any lump-sum payment you make in addition to your instalment amount will be applied to your outstanding balance, first against due or unpaid interest, then against due or unpaid fees and charges and finally against the outstanding balance, which includes the balloon amount.

Other episodes in ourStreet Smart video series:

In the first episode of our series – brought to you by Absa Vehicle Finance, Fulufhelo Mandane (Absa’s head of dealer relationships for Gauteng and Limpopo) discussed what you need to consider before you start shopping for a vehicle, the costs of ownership and your various finance options.Absa First-time Buyer Guide to Vehicle Finance

In the video that followed, Mandane’s colleague Gordon Wood (Absa’s head of dealer relationships for KwaZulu-Natal & Mpumalanga) detailedhow the newAftermarket Guidelines, which were recently introduced in the motor industry, affectyou as a vehicle owner.Absa’s Guide to Responsible Vehicle Ownership

Recently, Michelle Moodley (Absa’s head of sales enablement) emphasised the importance of takingprecautions to avoid falling into fraudsters’ traps.Vehicle Sales Fraud: What to look out for

And, finally, Sbu Dhlamini (head of compliance at Absa) gave an initial explanation of some of the terms in an instalment sale agreement. Understanding your instalment sale agreement [Part 1]

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The New Normal, Podcast 1 – Changes in SA’s car-shopping patterns